Banks prepare to slash mortgage lending over fears borrowers will default

Borrowers with large deposits are particularly at risk, as banks plan to pull back lending most sharply for those with a loan-to-value ratio of 75pc or less.

By contrast lenders expect to keep making more cash available for those with deposits worth less than 10pc of the value of their homes.

Andrew Wishart at Capital Economics said this is because lenders earn smaller margins on those large-deposit mortgages, and so are squeezed hardest at that end of the market as interest rates rise.

“That should weigh on buyer demand and bring down house price growth sharply in the second half of the year,” he said.

Sarah Coles, personal finance analyst at Hargreaves Lansdown, said buyers should anticipate tougher checks by lenders.

“A growing number of banks are also factoring higher prices into their mortgage calculations, so borrowers may not be able to get the size of loans they were expecting,” she said.

“Mortgage lenders say they expect to tighten lending as we go through the spring, which could start to apply the brakes on the housing market.”

Analysts at Moneyfacts found the average interest rate on a two-year fixed mortgage has risen to 2.86pc, the highest since June 2015 and up by 0.21 percentage points over the past month.

The number of individual mortgage products on offer dropped from 5,356 in February to 4,838 in March, Moneyfacts said, though the range edged up again to 4,925 this month.

Economist Kallum Pickering at Berenberg Bank said that there are “rising near-term risks” to the housing market as “the UK economy has hit a rocky patch. Consumer confidence is flashing red.”

“Whether the drop in demand turns into a genuine housing market correction in which prices start to decline nationwide will depend a lot upon whether consumer confidence and housing demand rebound through the third quarter, as we expect, or whether the shock persists through the second half of 2022,” he said, adding that in the long-term house prices should keep rising.

“Once economic activity bounces back following a possible near-term pull-back, the housing market and prices should return to growth on trend. An increasing population and a rising number of households support structural demand. In addition, mortgage availability remains favourable even as interest rates rise to more historically normal levels.”

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